HELOC Tax Deductions

One of the advantages of borrowing money through a HELOC is the possibility of deducting interest from your taxes. This article explains the basics of taking a HELOC tax deduction.

How much HELOC interest can I deduct?

To put it simply: If your HELOC was used to improve your home, you may deduct interest on lines up to $1 million ($500,000 married filing separately). If your HELOC used for other purposes, you may deduct interest on lines up to $100,000 ($50,000 married filing separately).

Here’s what the IRS says:

Mortgages taken out after October 13, 1987, to buy, build, or improve your home, (called home acquisition debt) but only if this debt plus any grandfathered debt totals $1 million or less throughout 2007. The limit is $500,000 if you are married filing separately.

Any mortgages taken out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if these mortgages total $100,000 or less throughout 2007, and all mortgages, including any grandfathered debt and home acquisition debt, on the home, total no more than your homes fair market value. The limit is $50,000 if you are married filing separately.

Can I deduct HELOC interest on second homes or income properties?

Possibly. You may deduct interest on HELOCs secured by your primary residence. You may also deduct interest on a second home HELOC provided that you do not rent the property out or that, if you do rent it out, you live in it for 14 days a year or 10% of the number of days you rent it out (whichever is greater).

Here’s what the IRS says:

Home mortgage interest is interest you pay on a loan secured by your main home or a second home. The loan may be a mortgage to buy your home, a second mortgage, a home equity loan, or a line of credit.

Your main home is where you live most of the time. It can be a house, cooperative apartment, condominium, mobile home, house trailer, or houseboat that has sleeping, cooking and toilet facilities.

A second home can include any other residence you own, and treat as a second home. You do not have to use the home during the year. However, if you rent it to others, you must also use it as a home during the year for more than the greater of 14 days or 10 percent of the number of days you rent it, for the interest to qualify as home mortgage interest.

How do I claim my HELOC tax deduction?

You can take advantage of the HELOC tax deduction by filling out Form 1040, Schedule A.

Here’s what the IRS says:

The types of interest you can deduct as itemized deductions on Form 1040, Schedule A are investment interest and home mortgage interest, including certain points.

Where can I find more information?

For more information, talk to an accountant or professional tax preparer. The IRS also provides articles on Home Equity Debt and Interest Expense on its website.